Don’t be afraid of these apparel retailers: analyst

Online, international expansion seen as biggest growth drivers

NEW YORK (MarketWatch) — Many apparel retailers have issued disappointing first-quarter forecast as colder weather has dented the appetite for spring merchandise, but one analyst isn’t hindered by the short-term setback.

“We believe that omnichannel investments will continue to drive incremental sales growth opportunities and accelerate profitability,” he said, adding Gap and Urban Outfitters have both been early leaders on that front. “The intermediate-term story, and what sustains growth levels well above the vast majority of the remaining U.S. retail industry, is international expansion, which we are very bullish on. We firmly believe that American fashion works abroad.”

While U.S. online apparel sales have risen to an estimated $41 billion last year from $28 billion in 2010, the analyst expects growth to continue at a “high-teens growth rate for at least the intermediate term.”

He said online sales have contributed to robust same-store sales. Online operating profit margin also can be 15 percentage points higher than that from physical stores. The analyst said specialty apparel chains’ control and distribution of their own brand also has shielded them from competition from Amazon.com Inc.
AMZN, +0.47%

Despite the emergence of such so-called fast-fashion chains as H&M and Forever 21, online selling has also kept the market share of chains such as Gap steady because those fast-fashion retailers don’t have “sizable” impact online because of their challenges with product consistency, he said.

Cushion against fast-fashion players

For instance, H&M has the largest online sales among the fast-fashion players at less than $300 million, far below Gap’s more than $1.5 billion in e-commerce sales, he said.

Regarding international promise, U.S. apparel retailers can look to the success of U.S. wholesale brands such as Ralph Lauren
RL, +0.05%
, Calvin Klein parent PVH
PVH, +1.81%
and North Face owner VF Corp.
VFC, +0.70%
, all three of which generate more than 30% of their respective sales overseas.

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The increasing “globalization of fashion trends” also is removing historically the largest barrier to entry when it comes to overseas expansion: the adoption of local styles and sizes.

“There will always be a portion of each market that is local, but that appears to be declining and there are already sizable enough market opportunities in most countries to make international growth attractive,” he said.

Just as online selling is more profitable, he estimated that every 1 percentage point of international revenue equates to approximately 0.3 percentage point of incremental gross margin expansion.

For Gap, the analyst said the retailer has “a substantially improved business model relative to the last decade,” adding it’s getting a lift of at least 1.5 percentage points to its same-store sales from higher online sales. Gap also has benefited from the struggles of J.C. Penney Co.
JCP, +7.23%
, he said.

He also dismissed concern about L Brands’ sales slowing down.

The company “is a fundamentally best-in-breed specialty retailer with a best-in-breed management team,” he said.

For Urban, his recent checks suggest that the company’s business remained “resilient” even though it has been a tough February for specialty apparel retailers. Urban Outfitters said late Monday in a filing that its quarter-to-date same-store sales are up in the high-single-digit rate.

Reuters

On Abercrombie, he said any potential share upside won’t come until “substantial, multi-year change occurs to address the fundamental reasons for the company’s challenged performance.” The company, for instance, falls behind rivals American Eagle and Aeropostale Inc.
ARO, +5.26%
in terms of its supply chain development, he said.

While Abercrombie has shut 183 stores the past three years, its U.S. physical-store business still hasn’t stabilized while its domestic online business has showed weakening signs. The company’s major overhaul, including seeking ways to lower costs, also comes with risks.

The goals “could be difficult to implement properly without disruption in the business,” he said.

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